Murabaha
Synonyms: Cost-Plus Financing، Murabaha to the Purchase Orderer، Islamic Cost-Plus Sale
Last updated: 2026-09-25
Short Definition
Real estate murabaha is an Islamic financing structure in which the financier buys and takes ownership of the property the customer has chosen, then sells it to him at a deferred price equal to cost plus an agreed profit, repaid in fixed installments.
Overview
Legal Basis
Real estate murabaha is governed by the Real Estate Finance Law (Royal Decree No. M/50 dated 13/8/1433H) and its Implementing Regulation: Article 9 (contract contents, including total price, installments, APR and early-repayment procedures), Article 12 (verifying the title deed and absence of affecting in-rem rights) and Article 11 (loan-to-value limits). The mortgage is registered under the Registered Real Estate Mortgage Law (Royal Decree No. M/49 dated 13/8/1433H), and SAMA's early-repayment guide caps compensation at three months' term cost and the lock-out period at two years.
Practical Example
A citizen chooses a SAR 1,200,000 villa in Al Khobar as his first home and pays SAR 120,000 (10%). The bank buys the villa from the owner, takes ownership, and sells it to the customer by murabaha: the remaining SAR 1,080,000 is priced at a profit equivalent to 5% a year over 25 years, giving a fixed monthly installment of about SAR 6,313.57 and total installments of about SAR 1,894,072, i.e. total profit of about SAR 814,072; the villa is registered in the customer's name and mortgaged to the bank. Ten years later the customer inherits money and repays early: the outstanding balance is about SAR 798,384, and the bank may charge compensation of no more than three months' term cost (about SAR 9,942), so the customer saves about SAR 328,000 of profit he would have paid by continuing to the end, and the mortgage is released free of charge.
Common Mistakes
- ✗Signing the purchase contract with the seller in the customer's name before the financier owns the property, which breaks the murabaha sequence requiring the financier to own first.
- ✗Believing the murabaha price changes with market rates, when it is a fixed debt after contracting unless a different product specifies another mechanism.
- ✗Thinking early repayment requires paying all remaining profit, when compensation is capped at three months' term cost.
- ✗Not checking the contract's early-repayment lock-out period, which can be up to two years.
- ✗Confusing real estate murabaha with tawarruq: the first is the sale of the property itself, the second is the sale of a commodity to obtain cash.
International Differences
Murabaha is among the most widespread Islamic structures globally, in the Gulf, Malaysia and Turkey (at participation banks). In some countries the double transfer of title (to the financier, then to the customer) triggers double registration fees or taxes, which legislation addresses with specific reliefs, as happened in the UK. In conventional markets the equivalent is a fixed-rate mortgage loan. Saudi Arabia stands out for capping early-repayment compensation at three months' term cost, clearer than many markets that leave prepayment charges to negotiation.
